At the end of 2020, we ventured to make five outrageous predictions for the property market in 2021 – so outrageous that we did not entirely believe in them, but still with a touch of feasibility. So, where are we today, six months later?
In December 2020, we did some out-of-the-box thinking. We wanted to challenge consensus. And we arrived at these predictions, when we were in the midst of winter darkened by the shadow of the coronavirus threat, still without vaccines:
- Initial yield requirements dropping below 3.00%
- At least two hotel chains stand to face bankruptcy or reconstruction
- Residential rents dropping, but not in Copenhagen
- Mark-to-market taxation being abandoned
- Transaction volume increasing by 50%
- And where are we today – only six months down the road?
1 - Net initial yields dropping
Long-term interest rates have gone up, giving rise to strong concerns of further rate hikes, also as far as short-term interest rates are concerned. Inflation is climbing, in particular in the United States, forcing the FED to tighten monetary policies to avoid overheating. Europe too is seeing budding signs of rising inflation.
Nobody knows for certain if rising inflation is a natural and temporary knock-on effect of the reopening of society post COVID-19, or if it is a long-term phenomenon, driven by exceptionally expansive monetary and fiscal policies.
Real estate, however, is perceived as an inflation-hedged asset class, with no signs of an increase in yield requirements, quite the opposite.
In the H1 2021 transactions where the net initial yield was around 3.00%, it was possible to leverage on rent reserves or other optimisation potential to justify a lower net initial yield.
However, we are convinced that today’s initial yield on top-quality properties in the residential and office segments alike stands at 3.00%, even if you discount reserves or other optimisation potential. Domestic buyers will hardly be clamouring to buy at such prices, but there will likely be buyers from other European countries as well as from North America and the Far East.
2 - Two hotel chains facing bankruptcy or reconstruction
At the time of writing, BC Hospitality Group has undergone reconstruction, the share capital is lost, and fresh capital has been injected.
With its exposure concentrated in Copenhagen and a very substantial MICE component, BC Hospitality Group has been more severely hit by the coronavirus pandemic than most.
When shareholders and other stakeholders lose money, criticism invariably follows. However, Colliers is happy and proud to have assisted in raising fresh capital for a business that urgently needed it, when a collapse would have had not only dire consequences for the parties directly involved, but near-immeasurable consequences for Copenhagen’s entire hotel and MICE industry.
Are more going to follow? We certainly hope not. But with the relief packages being phased out, the Copenhagen hotel industry– unlike the provincial hotel industry – may well be facing the most difficult summer ever.
Given time, the Copenhagen hotel industry will undoubtedly make a full recovery. Nevertheless, the 2021 predicament could take its toll in terms of further casualties.
3 - Residential rents dropping
Investor demand is strong for residential properties, capital is more than abundant, and residential newbuilding is exceptionally brisk. Mainly German and Far Eastern investors are aggressive buyers in Copenhagen, and when Goldman Sachs invests in housing in provincial towns and cities like Silkeborg, Horsens, Viborg, Kolding and Randers, it is fair to say that international investors are present not only in Copenhagen and Aarhus.
The completion of a great many new residential units tends to trigger a higher risk of supply and demand imbalances. However, we have not really seen any indications of more structural vacancy, nor a resulting drop in rental prices. Nevertheless, the threat is latent in some markets. It will not seriously manifest itself in 2021, but 2023-2024 will see a drop in rental prices in some areas and for some types of housing.
4 - Mark-to-market taxation being abandoned
When you try to predict the future, it is sometimes hard to distinguish faith from hope. Indeed, there seems to be a stable political majority in favour of imposing mark-to-market taxation on property investors with effect from 2023. Against such a political majority, even the most well-reasoned arguments – citing arbitrary taxation, lacking procedural fairness and the failure of expectable proceeds to match the costs of administration and control – will often be in vain.
So far, we can but urge all investors affected by the proposed mark-to-market valuation of properties to secure the best possible proof of 2023 entry values and market values going forward.
In the years ahead, we will no doubt see many advisors touting valuation reports to serve as documentation for market values vis-à-vis the Danish tax authorities, SKAT. However, it will hardly be wise to try to save a few thousand kroner in valuation fees if risking that the tax authorities subsequently override the valuation because the quality and documentation are found to be wanting.
In other words: We (regrettably) believe that mark-to-market taxation will be introduced.
5 - Transaction volume increasing by 50%
At this point, it is premature to make a qualified estimation of the full-year transaction volume. However, the outrageous prediction – a 50% increase on 2021 – is not beyond reach.
Compared to most other European property markets, Denmark continues to offer quite favourable framework conditions. It is therefore not surprising that a great many international investors allocate substantial capital to Denmark. What is more uncertain, however, is whether there are sufficient investment opportunities.
We will not hit a record-high in the transaction market if the sellside is represented only by those that are more or less forced to sell, e.g. financially distressed investors, project developers making a living by developing and selling, and investors with an “expiry date”, e.g. property funds to be wound up.
However, there will also be several investors that, with good reason, use the market momentum to divest assets not aligned with their long-term strategy. The question then remains how many will be tempted by prices that are at an all-time high, knowing full well that the renewed placement of the freed-up capital poses a challenge in itself.
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